Checklist for Strengthening Your Defenses to 401k Plan Class Actions

The last ten years have seen a proliferation of high-profile class actions alleging breach of ERISA fiduciary duties of prudence and loyalty against plan fiduciaries. The claims are usually based upon alleged excessive investment management fees, excessive plan recordkeeping and other administrative expenses, and poor performance of investment options selected by and retained in the plan's investment menu by the plan's fiduciaries. Many of these cases also include claims based on alleged prohibited transactions between a plan and its fiduciaries or parties in interest under ERISA section 406.

Application of the governing legal standards (adapted from the law of trusts) to these claims – performance of fiduciary duties solely in the interest of the plan's participants and beneficiaries and with the care and diligence "under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims (29 U.S.C. § 1104(a) – is flexible, imprecise and fact-intensive.

These cases usually settle after protracted and expensive litigation, with substantial awards of attorneys' fees to plaintiffs' counsel. "Plaintiffs Ramp Up 401(k) Lawsuits." The Wall Street Journal, July 14, 2017. For example, surviving aspects of both the Tibble and Tussey cases, referenced below, are still being litigated after ten years of motion and appellate practice. Accordingly, it is in the interest of plan sponsors and plan fiduciaries to take all reasonable steps to head off claims quickly if they are asserted. The following checklist is offered as a non-exclusive guide for those purposes.

Strengthen Defenses to a Class Action

Have legal counsel evaluate the complaint in light of the prevailing case law in your jurisdiction. The following is a summary of seminal cases:

Tibble v. Edison International, 135 S. Ct. 1823 (2015).

The only Supreme Court case in the area held that plan sponsors have a continuing duty to review investments in 401(k) plans, even if the investment was initially selected outside ERISA's six-year statute of limitations period for fiduciary claims.

Tatum v. RJR Pension Inv. Comm., 761 F.3d 346 (4th Cir. 2014).

The Fourth Circuit affirmed the district court's holding that an employer breached its fiduciary duty under ERISA when it liquidated two employer stock funds held by a 401(k) plan, which resulted in substantial loss to the participants, without conducting a thorough investigation.

Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (2014)

"Because the content of the duty of prudence turns on 'the circumstances prevailing at the time the fiduciary acts [under 29 U.S.C. §1104(a(1)(B)] the appropriate inquiry will necessarily be content specific."

A fiduciary's actions are judged based upon information available to the fiduciary at the time of each investment decision and not from the vantage point of hindsight. A court is required "to consider the extent to which plan fiduciaries at a given point in time reasonably could have predicted the outcome that followed."

Tussey v. ABB, Inc., 746 F.3d 327 (8th Cir. 2014).

The court found that the fiduciaries breached their duty of loyalty and prudence by failing to:

Adequately monitor recordkeeping costs;

Determine whether the record keeping costs were competitive; and

Adequately leverage the plan's size to reduce fees

Significant facts were that plan fiduciaries were allowing revenue sharing as a kickback for including the record keeper's proprietary funds as plan investment options, had allowed the plan to subsidize non-plan operations of the plan sponsor and record keeper, and had disregarded a consultant's warning that the plan expenses were excessive.

Alert the fiduciary insurance carrier to get defense coverage in place.

Hire a damage expert to evaluate potential exposure from both plaintiffs' and defendants' best case perspective and help craft a settlement offer.

Be attentive to safeguarding the attorney-client privilege and work product doctrine protection in discovery and if the case goes to trial. Consider obtaining advice and analysis from consultant(s) who will not be a testifying as expert witnesses on summary judgment or at trial. Keep written consultant reports to the necessary minimum.

Hire a law firm with a good track record in winning ERISA fiduciary duty class actions or obtaining reasonable early settlements.

Early stage litigation strategy.

Attempt to knock out the case on a motion to dismiss, (as successfully done by Chevron in the recent case of White v. Chevron Corp., No. 16-cv-0793-PJH, 2016 U.S. Distr. LEXIS 115875 (N.D. Cal. Aug. 29, 2016). In the Chevron case, the District Court ruled that a fiduciary's decision should not be reviewed with hindsight but in light of the circumstances when the decision was made. The Court also said that while investment fees are important, they are only one factor to consider when selecting investments.

Likewise, in Meiners v. Wells Fargo & Co., No. 0:16-cv-03981-DSD-FLN (D. Minn. May 25, 2017), the court granted a motion to dismiss with prejudice against claims that Wells Fargo's Target Date Funds underperformed comparable Vanguard funds and were more expensive than comparable Vanguard and Fidelity funds. The court held that comparison of performance for different funds was insufficient to imply that the plan's decision making process was flawed, when the comparator funds had a different investment strategy. The mere fact that the plan's funds were more expensive than other funds did not support a breach of fiduciary duty absent facts that the claimed cheaper comparators were reliable, of similar size and offered similar services. In order to show that the fiduciary breached its duties by promoting its own proprietary funds, the court held that the plaintiff must provide additional facts showing that the fiduciary's decision was based on financial interest rather than a legitimate consideration. The Meiners dismissal has been appealed to the Eighth Circuit.

By stipulated agreement or, if necessary, motion, obtain a protective order to safeguard confidential information against improper use and disclosure of confidential information and a Federal Rules of Evidence 502(d) order to preserve rights to protect against inadvertent disclosure of confidential electronically stored information.

Take advantage of circuit law to the extent available to invoke the three-year statute of limitations of 29 U.S.C. § 1113(2) by demonstrating that the named plaintiffs had timely "actual knowledge" of facts necessary to support their claims. See, e.g., In re Northrup Grumman Corp. ERISA Litig., 2015 U.S. Dist. LEXIS 176822, **74-100 (C.D. Cal. Nov. 24, 2015) ("Under the standard adopted by the Ninth Circuit, the 'statute of limitations is triggered by knowledge of the transaction that constituted the alleged violation, not by plaintiffs' knowledge of the law, "citing Blanton v. Anzalone, 760 F.2d 989, 992 (9th Cir. 1985). Also see Sulyma v. Intel Corp. Inv. Policy Comm., No. 15-cv-04977-NC, 2017WL 1217185 (N.D. Cal. Mar. 31, 2017) where the Court ruled that the plaintiffs' claims were time barred under ERISA's three year statute of limitations because Intel sent financial disclosures which conferred "actual knowledge" of the transaction (not necessarily knowledge of the law) more than three years prior to the lawsuit. The Sulyma case is on appeal to the Ninth Circuit.

See also Brotherston v. Putnam Investments, LLC., No. 1:15-cv-13825-WGY (D. Mass. March 30, 2017), where the court, similarly to Sulyma, granted summary judgment for Putnam on certain claims based on the "actual knowledge" standard.. (On June 19, 2017, after the plaintiffs rested, the court entered judgment for Putnam on the remaining claims in Brotherston because the plaintiffs failed to prove loss causation necessary to support damages for breach of fiduciary duty). Brotherston has been appealed to the First Circuit.

If possible, try to settle cases before disposition of motions. Such a strategy will usually require class discovery, certification of a class for settlement purposes, notice to putative class members, a fairness hearing by the court, and a consent t order approving the class settlement and barring further litigation of class claims by class members.

Michael Delikat, a partner in the New York office, serves as Chair of Orrick’s Global Employment Law Practice, which has employment law teams in the European Union, Asia as well as the United States.

He also is the founder of the firm’s Whistleblower Task Force. He previously served as the Managing Director of Orrick’s Litigation Division.

Under Mike's leadership, Orrick’s Employment Law & Litigation group was recently named Labor & Employment Department of the Year in California for the fourth consecutive year by The Recorder, the premier source for legal news, in recognition of their significant wins on behalf of leading multinational companies on today’s most complex and challenging employment law matters. The practice group has also been chosen as one of the top national employment law practices by Law 360. In recognition of Mike's practice, Chambers USA and Chambers Global awarded him a Band 1 ranking, noting he is "sought out by premier clients to handle high-stakes employment litigation and investigations," and "a very persuasive advocate who knows the law inside out and is able to get to the heart of the issue very quickly."

He represents a broad range of major corporations in all facets of labor and employment law. Mike has an active trial, arbitration and appellate practice and handles a number of high-visibility class action and impact cases. Mike has extensive experience with litigation arising from trade secret misappropriation and the enforcement of post-employment restrictions, EEOC systemic investigations and litigations, wage-and-hour collective actions and other class actions based on gender and race, with particular expertise representing companies in the financial services industry.

Practice:

John D. Giansello III is resident in the New York office and a member of the employment law group.

Orrick’s Employment Law and Litigation group was recently named Labor & Employment Department of the Year in California by The Recorder, the premier source for legal news, in recognition of their significant wins on behalf of leading multinational companies on today’s most complex and challenging employment law matters.

He has considerable experience in and knowledge of litigation and counseling related to the hiring, firing, retention, management and promotion of employees.

Practice:

Patricia is Of Counsel in our San
Francisco office, and is an experienced advisor on the design, implementation
and taxation of qualified and nonqualified retirement benefits, deferred
compensation and health and welfare benefits. Patricia also regularly advises
benefit plan committees on their fiduciary duties.

Patricia is a trusted resource for her clients and leads complex
negotiations to provide innovative solutions with regard to benefits design,
administration and compliance. Patricia provides substantive expertise in the
defense of benefits litigation matters, has substantial experience with the
employee benefit aspects of sales and acquisitions of businesses and is an
expert on the Affordable Care Act and HIPAA.

Patricia regularly advises general counsel, executive management,
CEOs, boards of directors, retirement and health plan committees and key
leadership of Fortune 500 companies on complex questions and issues regarding
the operation of their domestic and international employee benefit plans and
compliance with federal and state law.

Before joining the firm, Patricia acted as Senior Manager of
National Employee Benefits at Kaiser Foundation Health Plan, Inc. and formerly
served as Senior Counsel-Benefits and Executive Compensation at AirTouch Communications,
Inc. (now Vodafone).

Patricia also acted as
Legislation Counsel on the Joint Committee on Taxation within the United States
Congress working extensively on the Clinton health care proposal and other
benefits legislation. Prior to the Joint Committee, Patricia was an associate
at Pillsbury, Madison & Sutro (now Pillsbury Winthrop).

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